Home ownership is probably one of the biggest financial decisions that you and your family will ever make.
For most first-time home buyers, taking a home loan is the only way through which they can bring alive their aspirations of owning a home.
How does one apply for a housing loan and what are the factors to consider? Does your CIBIL score help? How do lenders evaluate your profile?
It is normal to feel overwhelmed by all the questions and processes involved in financing your new home.
Understanding all the terms of a home loan is essential if you plan to take one; after all, you will have to repay it over an extended period of time.
Here are 5 things you should know before you apply for a home loan:
Check your CIBIL score and report
One of the things that you need to keep in mind is your CIBIL score. TransUnion CIBIL monitors and tracks your credit history and issues CIBIL scores ranging from 300 to 900. This score is an indicator of your creditworthiness and is the determining basis of a variety of factors.
One of the most important factors being your repayment history on any credit availed – like credit cards or other loans.
Whenever you apply for a home loan, the bank will check a variety of parameters, including your CIBIL score, income, and age – to name a few – and proceed with your application accordingly.
The higher the CIBIL score, the better the chances of your home loan getting approved.
Know your eligibility
Understanding your eligibility will help you draft your loan application more accurately, and also reduce the need to submit multiple loan applications at the same time.
You can check your loan eligibility with prospective lenders or by using online calculators to determine how much loan could you be granted.
Typically, lenders offer loans amounting to around 85 percent of the value of the property. Your loan amount will depend upon factors such as your CIBIL score, tenure of loan, your age, and your income (and your spouse’s, too, if he/she is a co-applicant), among others.
When a lender requests your credit profile to assess how much risk you possess as a borrower, it classifies as a ‘hard enquiry'.
These hard enquiries are shown on your credit report. Frequent multiple hard questions can adversely impact your CIBIL score and your chances of availing of the loan.
Refrain from applying for loans with multiple banks simultaneously
It is a common mistake made by individuals, unaware of the adverse impact on their credit score by frequent hits from creditors.
Banks check your CIBIL score when you apply for a home loan to determine your creditworthiness. Your CIBIL score may be affected by frequent inquiries from multiple banks.
The best way to ensure your home loan application is accepted is to search online and determine how much you are eligible for.
You can check with the bank where you have a salary account and can submit the application only once you know how much loan amount you can expect.
Interest, EMI and loan tenure
Based on your requirement, you can opt for a fixed interest rate or a floating interest rate, on your home loan.
As the name suggests, the former offers a fixed interest rate for the entire tenure of the loan. Meanwhile, the latter means that the interest rate charged by the bank will fluctuate throughout the tenure of the loan.
Additionally, the interest rate also differs from one lender to another.
Most banks offer a lower interest rate on home loans to borrowers with a higher CIBIL score. So, it is advisable to not default on any payments and maintain a healthy CIBIL score at all times.
After the loan amount has been decided with the lender, it is advisable to chart out the tenure of the loan and the corresponding EMI.
Ideally, the EMI shouldn’t exceed 45 percent of your total income. Make sure you find the right balance between loan amount, EMI, and tenure when applying for a home loan.
Reading the fine print
In addition to interest rates, banks levy a few other charges on a home loan – including processing fees, foreclosure charges, pre-payment penalties, and late payment penalties.
Independently, these may seem like a small percentage, but when applied to the entire home loan amount, it becomes a significant sum.
It is hence important to read through the form in detail and seek clarification where required, before proceeding with the home loan application.
A home loan is a long-term commitment which will account for a large part of your disposable income in the future. So, make sure you consider all its aspects and decide on a loan that aligns with your financial interests and make an informed decision.
(The author of this article is SVP and Head of Direct-to-Consumer Interactive, TransUnion CIBIL- a credit information company)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.